The Truth about Fannie Mae and Freddie Mac

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How Ralph Nader learned to love Fannie and Freddie

“It is time for [government-sponsored enterprises] to give up ties to the federal government that have made them poster children for corporate welfare. Most of all, Congress needs to look more to the protection of the taxpayers and less to the hyperbole of the GSE lobbyists. –Ralph Nader, testimony before the House Committee on Banking and Financial Services, June 15, 2000

“Fannie Mae and Freddie Mac should be relisted on the NYSE and their conservatorships should, over time, be terminated. –Ralph Nader, letter to Treasury Secretary Jacob Lew, May 23, 2013

People certainly do change.

Right now, one of Ralph Nader’s key projects, Shareholder Respect, is supporting a group called Restore Fannie Mae. They are fighting for “an end to the unconstitutional conservatorship of Fannie Mae and Freddie Mac by the U.S. government.” To that end, Nader has written an op-ed in the Wall Street Journal, “The Great Fannie and Freddie Rip-Off” and sent the above letter to Treasury Secretary Jack Lew, as well as one to the newFederal Housing Finance Authority director, Mel Watt. Nader also held a roundtable to drum up support for the cause, which largely seems to be about making sure shareholders get paid–but which seems an argument for a return to the status quo.

For most of their existence, Fannie and Freddie have been controversial. Critics argued that their gains during good years would go to shareholders and executives, while taxpayers would be saddled with any losses, thanks to an implicit government guarantee. That’s indeed what happened during the 2008 economic crisis.

Critics soon began to assert that the government-sponsored enterprises were largely responsible for the financial calamity. The more extreme critics, like Representative Jeb Hensarling (R-Tex.), now want the GSEs wiped out and the government completely out of the housing market. Even former Representative Barney Frank, once one of the GSEs’ strongest defenders, nowsays they should be abolished. In polite society, you do not dare say that the GSEs should be restored to their old selves.

The funny thing is, as his 2000 testimony shows, Nader was once among these GSE critics. You have to go back to the late 1990s, when what became an underground war against the GSEs had barely gotten started. Louisiana Representative Richard Baker was, at that point, one of the few people willing to get bruised trying to rein in the then very powerful housing giants. Baker tried to pass a bill that would tighten regulation of GSEs.

Nader’s congressional testimony was in support of Baker’s bill. He was vehement, warning that the GSEs would cause a taxpayer bailout similar to the late 1980s savings and loan crisis if the rules weren’t changed. (“Ralph Nader Predicted Wall Street Meltdown 8 Years Ago” read the headline on a Nader press release during his 2008 presidential campaign.)

“We are obviously not talking about GSEs interested only in providing the American dream of home ownership,” Nader said. “They have a big appetite that grows bigger as they saturate the mortgage market. They will reach out for more to maintain their high level of profits and shareholder dividends.”

It’s unclear how Nader got involved in the anti-GSE crusade. One longtime GSE watcher says that a guy named Jake Lewis, who worked as Nader’s spokesman around that time, previously had been a spokesman for the old House Banking Committee (now known as the House Committee on Financial Services). Armando Falcon, who became the head of Fannie and Freddie’s regulator and a huge opponent of the GSEs, was counsel to the House Banking Committee around that time. The longtime GSE watcher speculates that Falcon sparked Lewis’s interest, and maybe Lewis, in turn, sparked Nader’s.

Whatever the case, Tim Howard, Fannie Mae’s former chief financial officer, recalls in his new book, The Mortgage Wars: Inside Fannie Mae, Big-Money Politics, and the Collapse of the American Dream, that Nader helped to organize a 1999 conference where anti-GSE types could complain. (Ironically enough, Restore Fannie Mae calls The Mortgage Wars a“fantastic read,” which it is.)

It wasn’t long after this that the war got started in earnest. The big lenders and mortgage insurers started an organization called FM Watch, with the goal of curtailing Fannie and Freddie’s power. Then, in the wake of Enron, the George W. Bush White House, terrified of another scandal on its watch, decided to take on the GSEs. Both Fannie and Freddie had to do multibillion-dollar accounting restatements, and the chief executive officers and other top execs at both firms resigned. (At one point, I was sure that Fannie and Freddie were the bad guys. I’m less sure today. There are certainly two sides to the story, and if you want to understand the other one, read Howard’s book.)

Even after the denouement, Nader stayed involved. In 2006, he wrote a letter to then Securities and Exchange Commission Chairman Christopher Cox. “As you continue to investigate the Fannie Mae accounting debacle,” Nader wrote, “we are writing to urge you to seek civil sanctions, including disgorgement, from senior executives who profited directly from the misconduct at Fannie Mae, and that you urge the Department of Justice to give careful consideration to criminal prosecution of these individuals.”

Perhaps the most surprising thing is that despite his prescient warnings and his dislike of the GSE business model, somewhere along the way Nader bought stock in Fannie and Freddie.

As it turned out, the mid-2000s victory over the GSEs was small in comparison to what came later. When Fannie and Freddie were put into conservatorship in September 2008, the Treasury took 79.9 percent of their common stock and $1 billion in preferred stock. Which meant the Treasury had to be paid in full before any other shareholders realized anything. The Treasury also charged the GSEs a 10 percent interest rate on funds advanced to cover their capital shortfalls, double the rate the big banks had to pay on the money they took. Then, in 2012, Treasury replaced the 10 percent dividend with a “net worth sweep,” which in essence meant that Treasury would take every dollar of profit the GSEs made. In other words, it was now impossible for Fannie and Freddie ever to pay back the government.

In Nader’s Wall Street Journal op-ed, he wrote that even after the conservatorship, “some faithful shareholders, including me, held on, believing that they might have a chance to recover something–as did their counterparts in Citigroup, AIG and the rest of the rescued.” He also writes that the “mistreatment of the Fannie Mae and Freddie Mac shareholders, including me, is uniquely reprehensible.” He wants shareholders (and taxpayers) to recoup some of the benefits of profitable GSEs.

Nader is right. At one point, you could have argued that the disparate treatment of the GSEs and the big banks was warranted because the GSEs required a lot more money. At the peak of the crisis they required $188 billion in total from the government, versus the $10 billion to $25 billion that the big banks each took as part of the 2008 Troubled Asset Relief Program.

Then again, there are lots of other ways in which the government financially supported the banks. At one point there was also an argument that the GSEs, unlike the banks, would always be a black hole, draining money from taxpayers. But that hasn’t turned out to be true either: The GSEs will soon have sent more to the Treasury than they took.

In addition to Nader’s past opposition to the GSEs, there’s another irony here. Restore Fannie Mae describes itself as a “group of concerned taxpayers, students, families, shareholders and citizens who are dedicated to establishing fairness in America’s housing market.” But it is also aligned with the interest of powerful financial firms–not Nader’s usual pals!–including hedge fund Perry Capital and mutual fund Fairholme Capital.

Both Perry and Fairholme have sued the government, arguing that the 2012 restructuring of the conservatorship was illegal. Theodore Olson, the former U.S. solicitor general turned Gibson & Dunn lawyer who is representing Perry Capital, spoke at Nader’s Feb. 5 roundtable, discussing the impact of conservatorship on the GSEs.

Maybe it’s fitting that the topic of housing makes for interesting bedfellows. This past weekend, New York Times columnist and long-time GSE critic Gretchen Morgenson also wrote a piece sympathetic to the shareholder point of view.

Apart from getting his money back, it isn’t clear what Nader’s goal is. What he doesn’t want is to see the housing market handed to the banks, which would be the result of most of the GSE reform bills now circulating around Congress. Restore Fannie Mae makes a point of saying that “responsible lending standards” should be enshrined in the GSEs’ charters. But if Nader wants a fundamental change in their structure from the pre-2008 days, I can’t find a clear overview of what that is.

Messages seeking comment sent to Nader’s organization and Restore Fannie Mae through their websites received no response from Nader. Nader was not contacted directly.

Is it just a story of pure hypocrisy, the way we can all change our minds when our own money is at stake? Or did the 2008 fiscal crisis, along with the right’s highly politicized efforts to blame it on the GSEs, make Nader realize that the alternative of the big banks might be worse?

Has Nader come to believe, in a twist on Winston Churchill’s famous saying about democracy, that the GSEs might be the worst possible way to finance housing–except for all the others?